ReEconomist

SoCal Real Estate - Sales Up, But Prices Are Still Down

Tim,

You bring the key to home price stability, which is the re-alignment of home prices to their historical ratio to income levels. Income levels act as sort of ceiling on prices, limiting how high they can rise.

If you do the math and realize sensible lenders will only permit a borrower to use a maximum of 28% of their income for housing costs including mortgage payments, you get a maximum ratio of 4 to 1.

During the boom, home prices when to 8 and as high as 10 times income levels. When you go from 10 to 1 back down to 4 to 1, that;'s a 60% correction. Keep in mind, it takes a 4% rise in incomes to enable home prices to rise 1%. With the economy teetering, income levels may stagnate for a while or even fall.

To see the historical home price to income ratio, the bubble ratio and what happens to prices when we return to the historical ratio check out the Home Price Ceiling Fundamental at UsHousingMeltdown.org